Cairo

Perhaps the best thing about Egypt’s emergence as Africa’s second largest economy, overtaking South Africa, is that it had nothing to do with a Gross Domestic Product (GDP) rebasing exercise ─ the periodic revision of GDP estimates, as done by Nigeria and Kenya in 2014, with a view to obtaining an up-to-date reflection of the economy and changing dynamics across sectors. Not to say that there is anything fundamentally wrong with GDP rebasing, except that, too often, the ensuing media brouhaha does more to create an illusion of growth than demystify the underlying recalibration of the economy.

But before we make a toast to Egypt, let us ponder over a critical episode in history. In 1979, the original publication of Prof. Ezra Vogel’s ‘Japan as Number One’ made its debut with the blurb ‘lessons for America’. Anchored on Japan’s rise in global competitiveness, export led growth and adaptability to change, the book (and its title specifically) inadvertently helped fan the view that the economy was poised to overtake that of the US in size in the not too distant future.

The intervening decades have been far less rosy for Japan and thirty five years later, Japan is number three (in GDP size), its dominance on the global stage remains significant but undermined by years of muddling through economic malaise. The rise of China as a pivotal economy in Asia has certainly not helped matters. In 1981 the US GDP was 2.6 times as large as Japan’s, a proportion that would widen to 3.8 by 2014.

Moral of the story? So much for growth and the premium attached to it! In the hype of accelerated momentum, blind-spots on underlying fault lines tend to take root! It is important, therefore, that the rise of Egypt is observed through an objective prism.

A Phoenix Rising from the Ashes, or is it?

To its credit, Egypt’s recovery from the wave of protests that defined the Arab Spring suggests the country wore off the overhang of the crisis better than its peers ─ in Libya, hope remains that the established unity government will provide the much needed firewall against what was widely perceived as disintegration into anarchy and in Syria the situation is out of whack as what started as a pro-democracy wave in 2011 galloped out of control with a death toll that stood over 250,000 as of August 2015, the last official statistics available.

Egypt might have eluded this route but it seems to be facing a different problem ─ sentiment that the government of Abdel Fattah el-Sisi is tightening its clamp on liberties, including the May 2016 arrest of journalists, is creating the impression of the 2011 civil upheaval having been a false dawn and a revolution in form but less in substance. A growing sense of disenfranchisement and high youth unemployment (with the World Bank estimating the share of the potential labour force aged between 15 and 24 years that is unemployed stands at about 42 per cent) present fodder for making the population potentially restive in future, creating a pressure point for the country’s much sought political transition and socio-economic fabric.

How will Egypt weather the volatile global economy?

Another major challenge faces Egypt. In 2011, as the country caught the bug of the Arab Spring, commodity prices were at their peak with the OPEC basket averaging $ 107.4 per barrel[1] and the country’s crude petroleum export earnings (about 21 per cent of total export earnings in 2014) were robust. Today, Egypt’s economy is resurging amidst a starkly different global environment ─ oil prices are subdued to lows last witnessed in 2008/09 at the height of the recession and key trade partners such as Turkey are on slowdown.

The turbulence has not been easy to navigate with the Central Bank undertaking the largest devaluation of the Egyptian pound (13 per cent) in over a decade in March 2016 as it loosened its grip of controls on the foreign exchange market hoping to address dollar aridity, driven by a weak inflow of foreign currency that had fanned the parallel market as well as support export earnings.

Where does this leave Egypt with regard to policy implications?

As traditional partners in Europe and Maghreb confront headwinds, Egypt’s trade policy going forward will likely seek to diversify more towards identifying economies in the sub-Saharan Africa region with whom to forge stronger ties. Available data indicates that the country’s intra-regional trade to GDP ratio stands at about 2.5 per cent against an average of 14.8 per cent across Africa (South Africa and Nigeria stand at 6.0 per cent and 5.0 per cent, respectively) pointing at low regional integration levels for Egypt.

With the prospect of the Tripartite Free Trade Area (encompassing the Common Market for Eastern and Southern Africa, the East African Community and the Southern African Development Community) increasingly shaping discussion on the future of trade in Africa, it would be an opportune moment for Egypt to integrate further into the continent’s trade landscape and leverage potential gains from the vast market that, upon fruition, will constitute about 58 per cent of Africa’s economy.

This will, however, be the easier part of the road ahead for Africa’s second largest economy. More daunting demands will be faced in policy reforms that, in essence, entail a trade-off between political and economic interests. Fuel subsidies, for instance, remain a policy headache even as the country looks to tighten it purse strings and trim its fiscal deficit. In May 2015, under the weight of swooned oil prices, Angola ceased fuel subsidies and inflation has since been on a runaway spree standing at 26.4 per cent as of April 2016. Such is the dilemma Egypt faces in the years ahead.

[1] Bloomberg data

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Notes:

  • The post gives the views of its authors, not the position of LSE Business Review or the London School of Economics.
  • Featured image credit: Cairo, Andrew A. Shenouda CC-BY-2.0
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Julians Amboko1 (2)Julians Amboko is a Research Analyst with StratLink Africa Ltd, a Nairobi-based financial advisory firm focusing on emerging and frontier markets. He covers macroeconomic research and analysis for Sub-Saharan Africa, including markets such as Nigeria, Kenya, Ethiopia, Ghana, and Angola.